Heineken
sign is seen at the main access to the new Heineken brewery in
MeoquiThomson
Reuters

By Julie Zhu and Kane Wu

HONG KONG (Reuters) - China Resources Beer (Holdings) Co Ltd is
in talks to acquire Heineken NV’s China business in a deal that
could be worth more than $1 billion, as the country's largest
brewer seeks new growth from premium brands, five people close to
the discussions said.

The negotiations come as global beer giants such as Heineken, AB
InBev (ABI.BR) and Carlsberg (CARLb.CO) are facing fierce
competition from local rivals and each other in emerging markets,
which have been touted as the growth engine for the world's
biggest brewers.

China is the world's largest beer market by volume. CR Beer's
biggest brand, Snow, is the world's top-selling beer, but is
almost exclusively sold in China.

One of the sources said the deal between CR Beer and Heineken
would most likely include three breweries - in Guangdong, Hainan
and Zhejiang provinces - Heineken's distribution operation and
its brands in China.

The two brewers have discussed a share-swap as part of the
transaction, the source said.

Details have not been finalised and talks could yet fall apart,
the sources said. They declined to be identified as the
information is not public.

CR Beer did not immediately respond to requests for comment.
Heineken declined to comment.

Heineken, which entered China in 1983, has struggled to set up a
strong distribution network and to make a mark with its flagship
Heineken lager, which lags far behind AB InBev's Budweiser in the
premium market, industry analysts say.

The Dutch brewer had a 0.5 percent share of the China market by
volume in 2016, according to research firm Euromonitor
International, while CR Beer accounted for more than a quarter.

Heineken sells its premium lagers Heineken, Tiger and Sol in
China, along with cheaper local brands Anchor and Hainan Beer.

The company has invested millions of dollars in promoting
Heineken as the global lager of choice, predominantly through
sports, including soccer and Formula One. Next month will mark
its second time as prime sponsor of the Chinese Grand Prix.

Beer sales volume in China has been declining since 2013 and is
forecast to continue to fall, according to Euromonitor. Sales of
higher-margin premium beers, however, have been growing at a
double-digit rate each year during the same period.

"CR Beer doesn’t have super-premium lagers, while Heineken has
high-end brands but lacks scale in China," said one source.
"Heineken is a natural target for CR Beer."

Heineken's eponymous brand sells for three times the price of
Snow in China. Chinese beer drinkers are overwhelmingly consumers
of low-margin inexpensive beer, which makes up 80 percent of the
market by volume, compared with an average of 18 percent in big
developed markets, according to Nomura analysts.

Last year Japan's Asahi Group Holdings sold its 19.9 percent
stake in Tsingtao Brewery Co - CR Beer's biggest domestic rival -
for $937 million as it decided to focus on Europe and elsewhere
in Asia.

That acquisition helped the Chinese brewer turn around its
business. In 2016 it reported its first annual profit in three
years after a renewed focus on the Snow brand and expanded sales
in key Chinese cities.

Shares of CR Beer were trading at HK$30.85 on Thursday in Hong
Kong giving the group a market capitalization of about HK$100
billion ($12.76 billion). Heineken shares were at 85.78 euros
($106.36) in early trade, valuing the group at 49.4 billion
euros.

Heineken trades on an enterprise value - market capitalization
plus debt - of 12 times its earnings before interest, tax,
depreciation and amortization in the last year. That is above
Carlsberg's multiple of 10 but far short of CR Beer's 23.

($1 = 7.8336 Hong Kong dollars)

($1 = 0.8065 euros)

(Reporting by Julie Zhu and Kane Wu in HONG KONG; additional
reporting by Phil Blenkinsop in BRUSSELS, Martinne Geller in
London and Adam Jourdan in Shanghai; Editing by Gerry Doyle)